An important and politically significant guide to the Great Depression

Summary: the combination of intense political polarization and a long deep economic downturn has made the events of the Great Depression important again — both as part of both parties’ positioning and for lessons about the appropriate public policy response. One book has become an rallying point for Republicans, from which they derive their proscriptions for the current crisis: “The Forgotten Man: A New History of the Great Depression” by Amity Shlaes (2007). This post looks at two reviews that provide insights both about her book and the history of the Great Depression.

These are both brief excerpts of articles which I strongly recommend reading in full. The NYRB’s excerpt is short, but you can click thought to read it — since they have generously unlocked this subscribers-only webpage for a few months. Take advantage of it! It is worth reading both as a review of Shlaes politically important book and as a quick look at this vital and relevant period in our history.

Chait’s review is far more hard-hitting than the charitable and academic tone of Friedman’s review. Taken together they provide a good foundation to read about today’s political and pol-economic conflicts.

The Forgotten Man: A New History of the Great Depression
by Amity Shlaes
HarperCollins, 464 pp., $26.95

Long-Range Public Investment: The Forgotten Legacy of the New Deal
by Robert D. Leighninger Jr.
University of South Carolina Press, 265 pp., $24.95 (paper)

Shlaes … follows what has become standard conservative thinking in denying that Roosevelt’s programs had anything to do with the recovery. … Indeed, focusing on unemployment and the stock market rather than production and incomes, she mostly writes as if no recovery occurred at all. Her view of Hoover is more unusual (although it too owes something to earlier treatments). In her account, Hoover as president was an activist, to be lumped together with Roosevelt. His policies made the depression worse, but for the same reason that Roosevelt’s impeded the subsequent recovery: “From 1929 to 1940, from Hoover to Roosevelt, government intervention helped to make the Depression Great.” Both men stand equally condemned for their policies, and both are seen as having morally unattractive personalities.

Several problems prevent Shlaes’s argument from being fully credible. …

About the author: Benjamin M. Friedman is the William Joseph Maier Professor of Political Economy at Harvard. His most recent book is The Moral Consequences of Economic Growth. (November 2008)

A generation ago, the total dismissal of the New Deal remained a marginal sentiment in American politics. Ronald Reagan boasted of having voted for Franklin Roosevelt. Neoconservatives long maintained that American liberalism had gone wrong only in the 1960s. Now, decades after Democrats grew tired of accusing Republicans of emulating Herbert Hoover, Republicans have begun sounding … well, exactly like Herbert Hoover. When President Obama recently met with House Republicans, the eighty-two-year-old Roscoe G. Bartlett told him that “I was there” during the New Deal, and, according to one account, “assert[ed] that government intervention did not work then, either.” George F. Will, speaking on the Sunday talk show “This Week,” declared not long ago, “Before we go into a new New Deal, can we just acknowledge that the first New Deal didn’t work?”

When Republicans announce that the New Deal failed–as they now do, over and over again, without any reproach from their own side–they usually say that the case has been proven by the conservative columnist Amity Shlaes in her book The Forgotten Man. Though Shlaes’s revisionist history of the New Deal came out a year and a half ago, to wild acclaim on the right, its popularity seems to be peaking now. Fred Barnes of The Weekly Standard recently called Shlaes one of the Republican party’s major assets. “Amity Shlaes’s book on the failure of the New Deal to revive the economy, The Forgotten Man, was widely read by Republicans in Washington,” he reported. “So were her compelling articles on that subject in mainstream newspapers.”

This is no exaggeration. The Forgotten Man has been publicly touted by such Republican luminaries as Newt Gingrich, Rudolph Giuliani, Mark Sanford, Jon Kyl, and Mike Pence. Senator John Barrasso was so eager to tout The Forgotten Man that last month he waved around a copy and announced, “in these economic times, a number of members of the Senate are reading a book called The Forgotten Man, about the history of the Great Depression, as we compare and look for solutions, as we look at a stimulus package.” Barrasso offered this unsolicited testimonial, apropos of nothing whatsoever, during the confirmation hearing for Energy Secretary Steven Chu. Chu politely ignored the rave, thus giving no sign as to whether he had heard the Good News. Whether or not The Forgotten Man actually persuaded conservatives that the New Deal failed, in the time of their political exile, which is also a time of grave economic crisis, it has become the scripture to which they have flocked. …

Jonathan Chait is a senior editor at The New Republic.

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12 thoughts on “An important and politically significant guide to the Great Depression”

Thanks for good material. Related article from NYRB by Robert M Solow reviewing A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression by Richard A. Posner, including excellent overview of current situation including with well-reasoned argument for why we are not – yet at least – in a Depression (fwliw I agree): “How to Understand the Disaster“, 14 May 2009.

I also very much agree with his argument placing over-leverage (a result of laissez faire regulatory policies) front and center in the maelstrom therefore bolstering his argument that the real economy or housing over supply were not so much the drivers of decline etc. as would otherwise have been the case had such hyper-over-leveraged (and much expanded) financial sector inputs not been in play. Of course one can argue that one of the principal contributing causes of that dynamic was the underlying weakness of an increasingly outsourced, less actually productive real economy so money was increasingly encouraged to chase its own tail to get good returns but even so: without excessive leverage the damage would have been far less and also the temptation to put all financial eggs in such over-leveraged baskets significantly reduced.

The economic historian Alexander Field, for example, has argued that the years between 1929 and 1941 were the most technologically progressive period on record in US history, with both private businesses and government contractors introducing many new technologies and practices.[1] Field points to advances in chemical engineering, aeronautics, electrical machinery and equipment, electric power generation and distribution, transportation, communication, and civil engineering. He argues that many of the innovations nowadays commonly associated with World War II were already in widespread use before the war began.

This rings true to me. In terms of innovation, it does seem that the lead up to depressions is characterized by suppression of competitive threats from new technologies, and when the dam bursts, there is financial suffering, yet simultaneously, innovation is allowed to proceed. In the lead-up phase, equity holders seek protection from competition through rent seeking, while labor resists threats from increased productivity. Bond holders feel safe, hiding from risk in bonds. After the crash, bond holders expect lower yields, while simultaneously better understanding the true risks of bonds. Equity distributions compete with bond yields and perceived bond risk. After the crash, equity looks more attractive to investors, especially if expected earnings are grounded in innovation and demonstrably increased productivity.

In the dot-com bubble market, the story being pitched to investors was overblown in the extreme, the only way equities could compete against high bond yields, which were perceived to be risk free at the time. Now, bonds are revealed to be anything but risk free,(ask even secured GM bondholders about bond risk),and so here we go again, presumably into a period of financial suffering coupled with rapid technological innovation.

One school of long cycle theory posits that depressions/recessions force capital to take risks in new industries and technologies that eventually cause major productivity improvements through the economy. During a downturn, the usual cash cows stop or reduce the dividends – the return on capital falls so the pressure for better returns increases. The usual investment opportunities dead end.

During the great depression, we had the invention of TV, jet engines, nuclear power, penicillan, etc. After WWII, the worldwide economy boomed. Add the discovery of the Ghawar oil fields and petroleum became exceedingly cheap.

Still, Friedman largely agrees with Shales – Hoover and Rooseveldt turned a recession into the Great Depression. Obama seems to want to do the same.
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.Fabius Maximus replies: Friedman largely disagrees with Shales, but does so very gently. He starts with “Several problems prevent Shlaes’s argument from being fully credible. …” and gives a rebuttal to each of her major themes.

I think these comments about how creative Depressions can be in terms of what comes out of them are valid and valuable. Two things in response:

a) what do you think might come out of it, optimistically speaking? Looks like new forms of energy technology are the main candidates, with perhaps nanotechnology although I hope that doesn’t get into putting little gizmos into animals, plants and people. GM is bad enough!
b) this highlights the urgent need to start addressing financial sector reforms NOW, not waiting 2-5 years for the casino-playing megabanks to clean up their balance sheets from losses due to over-leveraged speculation. Because until ACTUAL productivity becomes the main engine of economic – and thus attendant, derivative financial sector – growth, too much will keep piling into financial instruments which produce/develop nothing in and of themselves, and or more government-corporate boondoggles which mainly find ways to doctor up legislation that garners guaranteed legally-mandated returns to special interest corporate sectors (things like pharmaceuticals, insurance, military-industrial complex etc.).

Don’t look for an energy quick fix anytime soon. The technical innovation school also notes that there is about a 50 year lag between a fundamental science discovery and its commercial exploitation.

We’ve seen that in chemistry, electrical, biology, nuclear, radio, etc. Note that DNA was discovered about 1953 – when did gene therapy hit the market?

Financial innovations can be important too but they often rely on political/legal developments that spring, ultimately, from civilization leaps. Western society is looking more decadent by the year.
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.Fabius Maximus replies: The revolution in the biological sciences is starting to bear fruit. Technologically I see no signs of decadence in our civilization.

The NYRB article as a very good read, but I agree with Erasmus that the current Depression has much different causes than the Great one, a much different global context, and its outcome, economically, politically, socially, is almost impossible to predict.
The NR article, as much as I could read of it, is comparatively a worthless re-hashing of a tired old ideological rant against “big government.”

Innovation in the classic sense is a change in our way of thinking, like when the first glimpse through crude optical microscopes revealed an unforeseen micro-biological world of critters too small to see by eye. This changed our way of thinking about disease, ourselves, public health policy, and so on. It’s hard to predict “the next big thing” for this reason.

That doesn’t mean we can’t try. IMO a pregnant area for breakthrough innovation is chronic disease. This category of health care cost is literally bleeding us dry. The ever larger bite chronic conditions like diabetes, COPD, asthma, heart disease, and so on, is costing us is now the 800 pound gorilla of health care. Something is wrong here, waiting for a fundamental change in approach, a new way of thinking, an innovative solution. Existing drug companies love asthma. They sell tons of inhalers. Heart disease? Sell Statins! Diabetes? Sell insulin, and finger sticks! And keep selling them, year after year. Optimistically, the next wave of innovation will offer cures for these diseases, or even better, increase our ability to avoid the occurrence of chronic disease without substituting chronic drug therapies for good natural health.

Another big difference between US now and then: back then (1930) US was world’s greatest creditor nation whereas now she’s the world’s greatest debtor. (Not to mention that she’s run by criminal syndicates masquerading as ‘banks’, ‘lobbyists’, ‘govt officials’, ‘scientists’, ‘healthcare providers’, ‘the press’ etc. etc. etc.)

Time for a Constitutional Assembly to throw them all out!

Meanwhile, China is making steady, concerted moves to take over the financial system. I can’t vouch for either of these articles nor the sobriety of their (gold bug) authors, of course, but they have some interesting ideas and I suspect the second one is rather close to being on the money in terms of some of what happened at the G20 although my impression from afar is that Russia is losing ground in general on many fronts despite a bold face on the world stage right now.

About twenty five years ago, I was in college and during a study break I happened upon a pile of old ”
Scientific American” magazines from the late fifties and early sixties. One of the things that struck me was how different the ads were from the current magazines. Companies who were mostly involved in defense work ran ads. Contrasted with the ads for automobiles, and other non-scientific products that can be found in the current issues of the magazine, they were a revelation. These companies touted their superior technologies, and were clearly aimed at people who were in the “military-industrial” complex. US Steel, Bendix, Lockheed, GE, all advertising products not aimed at the backyard amateur scientist, but the professional scientist, likely in firms in the Forbes top twenty corporations. No liquor ads, no ads for automobiles.

It served to remind me that this country was once a technological colossus, and was proud enough to advertise this fact. There was no advertising for banks, or stock jobbing firms. Clearly the priorities of American have changed, some chaging for the better, some not so much. But the future as seen from the early 1950’s was very bright indeed, but it was nothing like the place we find ourselves in now. Is anyone else saddened by this change?

Yes, it is sad but since the 1970’s, when the globalists became more organised, this has been a steady unfolding from decade to decade more or less unrelated to different administrations or skirt length for that matter.

“In 1971, Zbigniew Brzezinski wrote in Between Two Ages: The Technetronic Era,

“…the nation-state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.” ”

Globalism works for multinational corporations using wage and policy arbitrage to accrue market share, power etc. etc. so from their point of view it really doesn’t matter if technology momentum that used to thrive in the US now thrives elsewhere for they are also in that elsewhere. It is worth reading up a little on the Trilateralist Boys if for no other reason that a high percentage of them are/were in the past few administrations, including the recently formed one. And in other countries too of course.

Amazing how long ago that comment was made. Brzezinski has been an important voice and architect of American global policies for a long time — our own Kissinger.

1971 roughly coincides with the end of easy American prosperity following WW II. From that point on, profitable investment opportunities were scarcer, and the result was “privatization” (opening former publically provided services — like the PO — to private business; “deregulation” — relaxing profit inhibiting restrictions on business; “globalization” (shifting of labor and markets overseas); and finally credit induced tech and real estate bubbles. The British economist Harry Shutt is a good source of information on these trends.

The implication of this perspective is that we should never assume that the national government is doing its best to protect our interests, but rather is acting as a kind of agent, and salesman to the public, for policies that are primarily developed by finance and the multinationals.

When I say that Friedman and Schales agreed, it is in that the actions of the federal government made matters worst.

If I remember my Friedman, his take was that the Federal Reserve Bank directly and deliberately caused a monetary contraction – there was less money to circulate and the money supply shrank. Schales gives substantial play to the fact that localities were making up their own ad hoc currencies because money was not be had. I don’t see them disagreeing about high tariffs or high taxes either.

Western civilization will avoid technological decadence only by avoiding civilizational decadence. Signs of the latter are apparent in abundance. while I’m not as pessimistic as Spengler, there is a lot to worry about.

1971 was also the year of peak US oil production. Cheap energy drives industrial civiliation. That’s one reason the left has opposed nuclear power. While not as cheap as oil back in the good old days, it is the next best thing going forward.